Strategies for successful property investment

Where and what you buy will affect your return on investment. Here are different strategies and tips to help you identify a investment property that fits your objective and investment profile.

Capital growth vs rental return

Typically, when you buy an investment property, you need to decide whether you buy for capital growth or rental return.

While it is possible to achieve both, it is more often that the property you buy falls into one of these two categories.

The capital growth investment strategy is where you buy a property that is expected to achieve above-average appreciation in property value over time. These properties are often found in capital cities, major regional centres or areas under development.

These properties often feature a higher purchase price and lower rental yield. This makes them negatively geared, ie the holding cost of your investment is higher than the income generated from the investment.

Advantages

• You may be able to utilise the equity generated from capital growth to expand your investment portfolio;
• Potential to achieve higher capital growth over time;
• Tax benefits from negative gearing.

Disadvantages

• These properties are typically more expensive, so that you need bigger deposits and finance to purchase;
• It costs you more to hold these properties as rental is usually not sufficient to cover the expenses, such as mortgage interest and other costs.

The rental return investment strategy is where you buy an investment property that is expected to achieve a strong rental return through high rents. These properties are often found in regional or outer suburban areas where rental demand is strong. These properties are also positively geared – the rental you receive more than covers the expenses such as the mortgage interest and other costs.

Advantages

• Banks are more willing to loan you to expand your investment portfolio;
• High rental income pays off the most, if not all, of the expenses, such as mortgage interest and other cost, so you may be able to afford to hold more investment properties;
• The excess rental income may help to pay off your home loan quicker.

Disadvantages

• You may need to pay more tax on excess investment income;
• The capital appreciation can be lower than the properties in growth area.

Determining which investment strategy – capital growth or rental return – is the better isn’t always clear-cut. You need to consider your specific situation to choose the right investment strategy and properties for you.

Brand new vs second hand property

One of the most asked questions for property investment is what is better, buying new or buying second hand. There are many arguments for and against, but here are some of the most common reasons for either.

Reasons for buying new

• Lower maintenance cost
• Attract quality tenants willing to pay a premium
• Quality construction and warranty
• Modern design with better energy efficiency and sustainability features
• Lower vacancy rate
• Higher claimable depreciation value

Reasons for buying second hand

• Established sales data
• Opportunity to negotiate on the purchase price
• Opportunity to value-add renovation
• Can be cheaper than new properties

Among the pros and cons of old versus new, one of the most compelling arguments is in the depreciation value of the home.

ATO has determined investors can claim depreciation on any home for a 40 year period form the date the construction is completed at 2.50% per annum. So for a brand new home, you can claim full depreciation benefit where if a home is 15 years old, you can only claim depreciation on the remaining 25 years.

Location, location, location

Finding the right location is crucial to ensure strong long-term capital growth and rental return for your next investment property. Here are some tips to help you locate the best possible location.

Know your budget

For most buyers, your budget dictates which areas you can afford to buy. The best way to determine your budget is to meet with one of our lending manager to obtain a pre-approval, Knowing your budget is a must before you start shopping around.

Shortlist your suburbs and preferred pockets

With your budget, you can choose from a shortlist of suburbs where you can buy. Most suburbs have preferred pockets for properties. The easiest way to identify these pockets is asking the local real estate agents.

Follow the infrastructure

Infrastructure, such as new roads and railway line, brings new jobs and population to the area and hence drives property prices. Follow the infrastructure is a proven strategy for investors to chase future value appreciation. You should look at where the government is upgrading infrastructure, as it is a sure sign of an up and coming “hot spot”.

Lifestyle attractions

Areas that offer lifestyle attractions are favored by buyers and renters when compared with other suburbs that offer fewer amenities. Walking tracks, large family parks and bushland, creeks, beaches and small community villages all offer unique point of difference,

Transport is important

Regardless of whether you live in the inner city or outer areas, transport is important. The more transport options available in a suburb, the more valuable the suburb will become over time, Easy access to major roads and freeways is a major plus for tenants as well as future buyers

Perfect tenant

Not all tenants are created equal. Certain tenants will make your life as an investor a breeze while others will make your life a living nightmare. Taking the time to choose the tenant for your property can help protect your investment.

Here are some insights on how to find the perfect tenant:

Keep the property in good condition

Be mindful of who you attract to the property in the first place. A well maintained and presented property will help you attract quality tenants. You don’t need a brand new million-dollar property in a water front location to attract the best property. You just need to provide a clean and tidy property with all fixtures and fitting in working order to start with.

Verify income

The perfect tenant will be financially responsible and will have sufficient means to pay their rental obligations in full and on time. It is essential to do an in-depth assessment of their income and financial obligations.

Check their rental history

It’s vital to check rental history with at least two previous landlords or property managers to assess a tenant’s suitability. Some of the questions that should be asked include:

• How did they treat the property and was there any damage other than regular wear and tear?
• How long did they rent the property for?
• Was the rent paid on time?
• Why did they move?
• Were there any lease violations?

A perfect tenant will have an impeccable rental history that demonstrates that they paid their rent on time and in full, and that they treated the property with respect and care.

Check References

Follow up with the references provided on the rental application. Check into character and work references work. For example, make sure that the applicant has a reasonably secure job.

Use professional property manager

A property manager can cost up to 10% of your total rental income each week, which is a factor that causes some people to question this option. However, the services that a good property manager provides can be worth far more than this fee. Renting a property requires a lot of work and a high level of commitment, which many property owners don’t have the time or the inclination to put in. A good property manager will handle all the headaches and downsides of renting for you, making life potentially much easier.